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AMD CEO talks about revenue slump, product plans

In a presentation at the Morgan Stanley Technology Conference, AMD CEO Hector …

In a presentation at the Morgan Stanley Technology Conference, AMD CEO Hector Ruiz tried to address the industry's concerns over AMD's Friday announcement that first quarter revenues would be lower than the expected $1.6 to $1.7 billion. This announcement sent the price of the company's stock tumbling by 3.7 percent.

The entire semiconductor market is currently in the midst of a seasonal slump in sales, according to a recently released report by the Semiconductor Industry Association, an industry trade group. Worldwide sales of semiconductors were up 9.2 percent over January of 2006, but sales are down 1.2 percent since last month in what the SIA characterizes as a typical seasonal decline. A Gartner report covered by the EE Times concurs with the SIA, blaming the semiconductor industry's slow start in 2007 on a routine seasonal slump.

This typical seasonal decline in revenue was factored into AMD's guidance, but the company still won't be able to meet expectations this quarter.

In his presentation, Ruiz blamed the recent slowdown in sales on AMD's inability to cope with increased demand from OEMs. In the past four years, explained Ruiz, AMD has gone from a company that relied on the retail channel for most of its sales to a company that relies mainly on business from first-tier OEMs. "That transition occurred probably faster than we had planned," said Ruiz. This left the company scrambling to serve both the retail channel and the OEM channel.

Ruiz said that AMD's decision to fill OEM orders left it unable to meet demand in the retail channel. "A channel partner needs a commitment for 30-60 days of products," said Ruiz, "and I couldn't give it to them, and they had to go somewhere else." Then, when OEM demand dropped at the year end, AMD was unable to flip their supply capacity back to the retail channel quickly enough.

"In an effort to compensate [for increased OEM demand], we took our eye off the channel, so we had a perturbation in the fourth quarter that persists into the first quarter," said Ruiz.

These supply shortages have been well-documented here at Ars, but Ruiz insisted that the company would be able to meet demand from both the retail channel and OEMs going forward.

Ruiz did not discuss the price war with Intel, but this has certainly had a negative impact on the company's revenue. In fact, the price war has hurt earnings at both companies, as each seeks to undercut the other in an effort to drive up market share.

Ruiz stated that AMD would like to get above a 30 percent market share, in order to "break the monopoly" that Intel has on the x86 microprocessor market.

Microprocessor market not "mature"

Throughout the presentation, Ruiz emphasized AMD's belief that the x86 market has plenty of room for double-digit growth. Contrary to the common perception of the microprocessor market as "mature," Ruiz suggested that there remain many places where the microprocessor has yet to live up to its potential. "There is an opportunity here in the very near term, when the industry is changing very dramatically," said Ruiz, "where the technology behind the computer is going to find its way into the home for entertainment. It's going to find its way into many other segments of the industry, education being one of them."

Ruiz made numerous references to the One Laptop Per Child program as one way that AMD expects to ship millions of units into the education market. He also emphasized the relatively low penetration of microprocessors into all facets of daily life both in the US and abroad, and he looked forward to the day when processors would be so ubiquitous as to be "invisible" in the home.

The merger with ATI, and Barcelona

Ruiz was asked to evaluate the merger with ATI, now that the companies have had a quarter to get to know each other. He responded that AMD now has the capability to sell both graphics and CPU silicon in all sorts of devices, from mobile devices to workstations. Looking ahead, he referenced the company's plans to integrate the CPU and GPU by saying, "We believe that heterogeneous cores are critical to being able to answer customers' needs in the future."

AMD's merger with ATI added $398 million of revenues to the recently reported Q4 2006 earnings, and a small ($13 million) operating loss. The costs of the merger itself are pretty much in the books now, so that won't be a concern going forward. Assuming that the aforementioned supply difficulties are behind them, the primary drag on AMD's revenues is now the price war with Intel, which makes Barcelona look all the more important.

AMD is counting on Barcelona both to consolidate and to further the gains made by the Athlon in the server and workstation markets.

AMD hasn't been shy in making bold claims for the forthcoming quad-core "Barcelona" processor, and this has led many analysts to suspect that the company may well be able to deliver much of the expected performance. Ruiz was certainly optimistic in this regard, repeating the company's claims of an expected double-digit performance increase over the current generation of dual-core parts.